Parity

Parity is a way of describing an option's price relative to its intrinsic value — the amount it would be worth if you exercised it right now. An option is "trading at parity" when its market price equals exactly that intrinsic value, with no extra premium tacked on for time or volatility.

To see this, you need to know intrinsic value first. A call option's intrinsic value is the stock price minus the strike price (if that number is positive; otherwise it's zero). A put's intrinsic value is the strike minus the stock price (again, floored at zero). So if a stock trades at $50 and you hold a $45 call, the intrinsic value is $5. If that call is actually priced at $5.00 in the market, it is trading at parity.

In practice, options almost always trade above parity, not at it, because buyers are also paying for "time value" — the chance that the option becomes worth more before it expires. An option trading right at parity, with zero time value, usually means one of two things: it's very deep in the money, or it's very close to expiration, so the market isn't pricing in much chance of further movement. Time value shrinks toward zero as expiration approaches, which is why near-expiry options tend to converge toward parity.

The nuance that trips people up is confusing "parity" with "cheap." Trading at parity isn't necessarily a bargain — it just means you're paying only for what the option is already worth if exercised, with nothing extra for optionality. It's also worth not confusing this options usage with other unrelated meanings of "parity" in finance, like currency parity (two currencies being equal in value) or price parity between related securities.